A University of Auckland study has identified a carbon tax as the most effective approach for New Zealand to cut emissions while maintaining economic stability.

The research compared carbon taxes, emissions trading schemes (ETS), and emission intensity targets, evaluating their impact on both the environment and the economy.

The study found that while all three policies lead to some short-term welfare losses, a carbon tax is less disruptive to household welfare in the long term.

Associate Professor Stephen Poletti noted that a carbon tax provides businesses with greater certainty about carbon pricing, unlike the volatility associated with an ETS.

Professor Emilson Silva, director of the university’s Energy Centre, highlighted the potential for revenue from a carbon tax to offset cost-of-living increases, such as rising food, transport, and energy costs.

He suggested that funds could be redistributed through income tax rebates or direct support to families in need.

Lead author Simon Tao, a doctoral candidate, emphasised the challenge of agricultural emissions, which are currently exempt from New Zealand’s ETS.

Lead author, Business School doctoral candidate Simon Tao

The study suggests that a carbon tax, used alongside the ETS, could be a more effective strategy for achieving the country’s environmental goals.

The researchers also addressed the cyclical nature of emissions, which tend to rise during economic growth and fall during downturns.

Tao proposed dynamic carbon pricing, where prices increase during periods of economic expansion, to stabilise emissions.

Dr Selena Sheng emphasised the importance of regional collaboration, suggesting New Zealand and Australia explore joint forums to align environmental policies.

She noted that harmonising tax strategies could maintain investment appeal while promoting sustainability.

The study underlined the critical role of public education in building support for a carbon tax, encouraging policymakers to communicate its long-term benefits effectively.